More Debate about the Validity of Economic Data

First off, a lot of investors and government officals have recently been trudging to Beijing in spite of the heat and mugginess and seem to be eager to discuss the outlook for China. Perhaps because the press, and more importantly a lot of Chinese academics and think tank types, are beginning to worry much more in public about the medium term outlook, the conversations seem to be a lot more worried than they have in the past. On my upcoming trip I hope to get some more idea of what big investors are thinking, and if I am allowed to repeat their views, I will.

Next, I see that recent US GDP numbers are getting a mixed reception. Second quarter GDP contracted by an annualized 1.0%. That isn’t a good thing, of course, but it is much better than the 6.4% contraction in the first quarter, and also better than the 1.5% contraction that the market was expecting. According to an article in today’s Financial Times:

While the contraction was much smaller than in the previous three quarters and slightly better than economists had expected, the data showed that the government stimulus and a slowdown in imports had cushioned the drop.

Of course most analysts continue to be worried about, and debate, whether the US is better off slowing the stimulus, and so reducing debt while speeding up the needed adjustments at the cost of higher unemployment, or continuing pushing forward – a debate very similar to that taking place in China. Given my focus on China my main concern – no big surprise – was US consumption, which declined by more than GDP, which I expect to be a regular feature of the next few years.

Consumer spending, which represents about two-thirds of GDP and has traditionally been the engine of US growth, fell a much worse-than-expected 1.2 per cent as Americans continued to cut back in the face of rising unemployment and the falling value of their homes and investments.

In Japan, a country that I am spending more and more time learning about because of some worrying parallels between their 1980s and China’s current condition, the numbers continue to be very poor. Again the Financial Times today tells the story:

Wages in Japan suffered their sharpest drop in nearly two decades in June, fuelling concerns that the economy would remain under pressure from depressed consumer spending. Monthly wages, including overtime and bonuses dropped 7.1 per cent from a year earlier for the 13th decline in a row to Y430,620, according to the Labour Ministry. It was the steepest drop in wages since the government began compiling data in 1990.

Wages in China, on the other hand, seem to moving in a very different direction – no surprise, I think, given the extent of the stimulus package. Here is what Xinhuasaid on Wednesday:

Average wage per capita for Chinese urban employees grew 12.9 percent year on year to 14,638 yuan (about 2,149.78 U.S. dollars) in the first half of this year, said the National Bureau of Statistics Wednesday. The growth rate was 5.1 percentage points lower than that in the same period last year, the bureau said.

Even acknowledging all the distortions, and recognizing that this year’s growth rate in wages was much lower than last year’s (will this put pressure on consumption growth?), this still seems like a very healthy growth rate. Funnily enough however the numbers were questioned in, of all places, today’s People’s Daily. In their article they had this to say:

Banter and sarcasm erupted in the wake of a National Bureau of Statistics (NBS) report Wednesday saying the average pre-tax wage per capita for urban employees grew 12.9 percent, year-on-year, to 14,638 yuan (2,142.43 U.S. dollars) in the first half of this year.

The seemingly inspiring and encouraging news did not draw much applause, but a hail of criticism from the public, with many being skeptical of the figures’ credibility. The term: “I’ve been given a raise,” referring to the furor over the NBS’s statistics, has become increasingly popular among China’s mass of Internet users.

On the popular online forum tianya.cn, a commentary read, “The statistics released by the NBS are miraculous, as the increase managed to surpass the GDP growth of 7.9 percent registered in the second quarter against a backdrop of the global financial crisis.” However, the poster noted, most people’s pockets remain shallow.

…A poll on tom.com showed as many as 88 percent of 2,816 respondents believed it is reasonable to doubt the income rise announced by the NBS.

I was impressed by the fact that the article just reported the skepticism and didn’t make much more than a very half-hearted attempt to explain why the public is wrong to be skeptical. As an aside, in recent weeks it seems to me that there has been an increasingly heated, but not always on-the-record, debate about the conflicts and contradictions implied by official Chinese growth numbers and other indirect measures of growth – with Marc Faber last week giving an especially blunt assessment. I have been hearing from a lot of Chinese and foreign colleagues about challenges to the data, and although I am not smart enough to contribute much to this debate, I expect it to become more public – already there have been several articles in the Chinese press referring obliquely to disagreements about the data and defending the quality of the NBS statistics. Perhaps the People’s Daily is now leading the charge for prosecution?

Speaking of prosecution in the Chinese press, Caijing continues to feature a series of excellent articles questioning the impact of the stimulus package. I won’t summarize them all, but I found this article in this week’s issue, by Chen Changhua, interesting:

Through bank lending and money supply, liquidity has been ample in the market. However, nominal GDP growth lagged far behind the growth in lending and money supply, which could raise suspicion that a large portion of the funding has entered asset markets.

In the next one or two years, the global economy won’t be able to recover and, due to overcapacity, consumer price index (CPI) will not be able to rise sharply. Even if the central bank wants to tighten money supply then, various aspects of society won’t support it. It’s no longer a question of whether the central bank should rein in its loose monetary policy, but whether or not it will actually do it.

China’s fiscal and monetary policies in the past few years have placed growth before anything else. It is unlikely that the Chinese government will raise interest rates when economic recovery has not yet been secured.

Chen’s basic argument is that policymakers should be encouraging private enterprises to compete with SOE’s because when the “bubble implosion” occurs (he doesn’t seem to think that the “if” is worth pondering), China will be better served by the productivity-enhancing private sector:

How quickly a country can recover from an economic slump is determined by the productivity of the country. Japan has not been able to recover from the 1990 slump mainly because there are not enough competitive new-generation enterprises to replace old enterprises.

If it is difficult to avert a new round of asset bubbles, then opening domestic markets to private enterprises is a good option. In the past few years, state-owned enterprises have become larger and stronger while playing the role of the offense while private enterprises have been on defense. Maybe it’s just a hope of mine that private enterprises will muster their forces soon as well.

One of the big worries about the stimulus, of course, is that it is forcing a further concentration of credit and economic activity into the SOEs, who are among the least productive players in the Chinese economy – even when you don’t question whether or not their profits are real or simply a function of highly subsidized interest rates.

Meanwhile the debate about the duration of the fiscal stimulus rages on. On the one hand Andy Xie, former chief Asian economist for Morgan Stanley, and someone well plugged into Chinese policymaking circles, said in an interview with Bloomberg:

“The government is worried that this bubble is becoming too big so they’re going to cut credit growth by probably half in the second half,” said Xie, now an independent economist, in a Bloomberg Television interview in Hong Kong today. “I think the property and stock markets will come under pressure probably around October time.”

China’s banking regulator said yesterday it plans to tighten rules on work capital loans, seeking to prevent misuse of funds. New loans in July may be less than 500 billion yuan, the Shanghai Securities News reported on its front page, without saying where it got its information.

It’s “undeniable” that a portion of this year’s new lending entered the nation’s stock and property markets, Cheng Siwei, former vice chairman of the standing committee of the National People’s Congress, China’s parliament, said in June.

On the other hand Vice Premier Li Keqiang (a graduate of Peking University, I am proud to say) wrote recently in Qiushi, according to an article in today’s Bloomberg:

China will maintain its “proactive” fiscal and “moderately loose” monetary policies to help the economy recover from a slump, according to Vice Premier Li Keqiang. The foundations of the recovery aren’t yet solid enough, as evidenced by the continued slide in exports, lower corporate earnings, falling prices and industry overcapacity, Li wrote in the Aug. 1 issue of Qiushi, a twice-monthly Communist Party magazine.

The outlook for the global economy is still uncertain and recovery is being hampered by rising trade and investment protectionism around the world, Li wrote. There’s been no “fundamental change” to the dollar’s dominant position in the international financial system, though the trend of diversifying away from the greenback will continue, he added.

Finally, and on a separate point, like me Nouriel Roubini has been wondering about the impact of recent Chinese commodity stockpiling. According to an article in Reuters today he gave a speech in which he discussed the impact of future commodity prices. Among other things he said:

“In the short term there has been a massive stockpiling of commodities by China,” he said. “My concern is that China might have accumulated an inventory of commodities that is probably excessive to the growth of their own economy.”

I agree. I am pretty sure that a lot of recent purchases represent many quarters and even years of future demand, and so they are distorting the trade numbers by implying the country is importing more than current demand implies. By the way for those interested in my argument as to why China should not be stockpiling commodities quite so quickly, here is today’s version of my bi-weekly column for the South China Morning Post.